Most of the unfinished business in Mexico’s energy industries is outside the public’s view. An exception is the request for dispute-settlement consultations filed on July 20, 2022 by the U.S. and Canada Governments, invoking Chapter 31 of the U.S. Mexico-Canada Agreement (USMCA). Canada According to the USTR, the Mexican government’s recent policies have been in apparent violation of obligations of the USMCA in relation to the treatment of investors and U.S.-sourced products in the oil and gas and electric power industries.
Renewables
Private investment in renewable sources of energy began in earnest following the Energy Reform of 2008. The Energy Reform of 2013-14 created a wholesale market for generation and an independent system operator National Center for Energy Control (Centro Nacional de Control de Energía-CENACE) to prioritize the dispatching of power based on economic merit.
The current administration. However, reversed these instructions and ordered that the Federal Electricity Commission’s (Comisión Federal de Electricidad-CFE) power be generated first, including power from plants using coal or diesel. Foreign companies in both conventional and renewable power are worried about the future of their investments.
Refining
The Mexican public is also worried about the massive investments of the current administration in the refining business. On presidential orders, the Energy Ministry (Secretaría de Energía-SENER) initiated plans to build a large refinery with a daily through-put capacity of 340,000 barrels. The cost is expected to approach $20 billion when completed in 2023 or 2024. Another investment of about $2 billion was in 2021, with the purchase of the 50% interest held by Shell Oil Company in the refinery in Deer Park, Texas.
The President assured the public that the purchase would quickly pay for itself in profits and increase Mexico’s energy security. Since then, $600 million in profits may have been earned, but none has yet been repatriated. As refinery output was already under long-term contracts, no new supply has been delivered in Mexico.
The Deer Park investment is of a different concern to the Houston Metropolitan Area. The new legal owner is a Delaware-registered holding company that is a twiceremoved affiliate of Pemex. Environmentalists would like to know how that company would respond, financially, to a major environmental or safety incident. A parallel concern is the residual financial liability of Shell in the task of environmental remediation when the time comes to decommission the nearly-100 year-old refinery. A Shell chemical engineer in Houston told me that the cost of decommissioning would likely be a billion dollars.
Upstream
Unitization is a topic that haunts U.S.-Mexico energy relations but went unmentioned by USTR. The Transboundary Hydrocarbon Agreement of 2012 set forth a framework for bilateral consultations but stopped short of a template for a unit agreement that would include the critical matters of operatorship, governance, and redetermination.
Where in other jurisdictions, disagreements are settled by an impartial arbiter, by the unitization rules published in Mexico, SENER— despite the obvious conflict of interes —would decide on the equities and operatorship. Regarding the 2017 discovery of a possible giant oil and gas field by investors led by Houston’s Talos Energy, LLC, Pemex quickly claimed that a portion of the reservoir extended into its adjacent block.
Pemex promised that it would drill an offset, or confirmatory, well in its block in 2018, but the drilling of that well, named Asab-1, has been rescheduled to 2023 at the earliest. Meanwhile, despite the absence of any empirical data from a well, in July of 2021, SENER ruled that Pemex had a hair over 50% of the reservoir and would become the operator of the future unit area. In response, Talos announced on September 3 that it would seek remedies under the USMCA.
Natural gas
USTR complains of SENER’s policy to require that commercial and industrial users of natural gas source their supplies from Pemex or the Federal Electricity CommissionCFE. Beyond this complaint, lie two other matters of unfinished business: underground gas storage and a secondary market in natural gas pipeline capacity. Storage has been authorized by law since 1995 but nearly 25 years later not one cubic foot of underground storage exists. The severity of the winter storm of February 2021 in Chihuahua would have been much less had CFE’s generators had gas from underground storage. The lack of a secondary market in pipeline capacity means that operators and regulators are unnecessarily limited in their ability to forecast bottlenecks. At the level of local gas distribution, the market has been limited by the practice of financially motivated city directors of public works to deny permits for expansion of service, denying the public the use of a safer, healthier fuel with a smaller emissions profile.
Conclusions
Much of the grief of energy investors and consumers may be traced back to the government’s desire to reposition the two legacy state energy companies as the principal commercial actors in their markets.
USTR hopes that the matters under dispute can be resolve without any damage to the U.S. trade and investment.
George Baker is the Houston publisher of Mexico Energy Intelligence™ and the director of the platform
www.energia-mx.com
@Energia_com
You can find his commentary in the Houston Chronical and in the Dallas Morning News.
